SLOAN BUSINESS SCHOOL - MASSACHUSETTS INSTITUTE OF TECHNOLOGY

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1 Si Li Master in Architecture 2007 Dimitris Papanikolaou Master in Architecture 2007 Daniela Tzvetkova MBA 2008 Assignment # System Dynamics A. Market: 2 nd familyhouse of Branded Architecture and Life Style. Organization: CASA GRANTURISMO Product: New Housing Typologies Background: Our customer, Casa Granturismo is located in Portugal in the city of Silves, located in the province of Algarve. Our client is planning on building a plot in an undeveloped but very promising part of the town. This part of town is promising because it s located right next to a newly built highway that will attract population coming from the overcrowded southern region. The goal of this product is to attract customers that value lifestyle and attractive architectural design. This is a high class product which is closer to a luxury good than to a regular housing. For this, Casa Granturismo plans to charge a price premium. The three segments of customers targeted are 1) Young families planning to have children and in need of larger houses 2) Older age group 4050 year old planning to retire in this house one day 3) Danish people who want to invest in a home away from home and value architectural design. One important detail about this new design is that Casa Granturismo will hire talented young architects and use different architecture designs for each new plot. 1

2 B. Support of Regional Goverment Shortfall of money Willingness of Bank to Give Loan R2 Credibility / Trust Physical Beauty of Municipality Ability to Realize Project Completed Branded Projects Attractiveness of Location of Municipality B1 Comissions of Projects Media Attention Economic selfsufficiency of Region Need to Create Value/Investment Demand for (Future) Projects Motivation of Developer Motivation of Competitors Seminars/ Conferences Support of Mayor/CMA R1 Political PR Mayor/CFA image promotion Media Reports Motivation to Buy Political Connecti ons Potential Buyers with access to Media 2

3 Price Construction Experience Construction cost Demand Alternative Housing Offerings Ability to build Second House Land Availability Land Acquisition Rate Selection of Location and natural environment Appeal Potential Buyers Adoption/Buying Undevelop ed Land <Developed Land> R6 Economies of scope Entering Competitors B Market Competition <Fund> B Land depletion Market Share Building Rate Buyers Social impact WOM Developed Land Product/technology/design features Strategy Experience R3 product differentiation R1 Complementary infrastructure network effects Housing Loan Policies Fund Revenue Bank Loan R2 R5 Gov't help for loan Goverment Motivation Credibility R4 Media effect on gov't Attention of Media Advertisement Awareness <Awarenes> 3

4 C. Below are the 5 factors we have identified starting from most to least influential. Below is a chart of the factor effects on attractiveness: 1. Selection of location and natural environment The factor location, location, location is far too common for the real estate industry. This is represented in the sshaped graph showing the effect of location to the attractiveness of housing. Again, we believe that the largest population will favor location which then with further increase of quality will start to have diminishing effect on attractiveness. Our competitors are ahead of us in term of location. This is because we are offering a new location that has not proven its value yet. We believe that the completion of the construction will drive up the attractiveness of our product to a level larger than that of our competitors. 2. Product/technology/design features The effect on the design of the housing reflects the distribution of population s appreciation for design features. We believe that appreciation for design is represented by a bell shaped curve most people are happy with average design. The left hand portion of people is just happy to have a roof (e.g. refugee camps). On the other extreme, the right hand portion of population places a very high value on design and would not be content in living in a mediocre housing (e.g. architecture connoisseurs). This behavior is reflected in the sshaped attractiveness curve, as a function of design features. The upper right part represents the connoisseurs, the middle portion reflects the masses of happywithmediocredesign population, and finally, the left portion represents people that have no claims on design. Our competitors lag in design compared to us. The collective housing in the city of Silves is average in design and thus we have higher attractiveness for our product. 4

5 3. Complementary infrastructure Complementary infrastructure affects attractiveness in a similar way. By complementary infrastructure we define availability and proximity to roads (highways, national roads), schools, commercial centers, entertainment (e.g. golf courses), hospitals, etc. For most of the population there is a threshold of necessary infrastructure without which the housing is less attractive. Once the threshold is met housing becomes attractive to the masses and finally it balances as attractiveness continues to grow. We are building in a new plot so in terns of complementary infrastructure we lag behind our competitors which are already enjoying proximity to some infrastructure. Since our project involves building some of that infrastructure we expect to quickly catch up with competition as the construction advances. 4. Housing loan policies Housing loan policies basically refer to the ease of access to loan to pay for housing of this type. In this case secondary house market falls under different bank 5

6 loan policy. We believe that there is a linear dependency between easeofloan and attractiveness of our product. Our understanding of the current competitive landscape leads us to believe that we are in the same position as our competitors with regards to dependency on the effect of easeofloan. 5. Price The price has an effect on attractiveness in a downward sloping sshaped curve. For a smaller price there is a very high relative attractiveness. Our product is somewhat price inelastic because it is considered a lifestyle good and people value lifestyle over small price increase. This is reflected in the flat line in the left portion of our graph i.e. initially as the price of the product increases the attractiveness remains the same. After a threshold is reached the attractiveness starts to drop faster until it flattens out to a very small number these are the people with a completely price inelastic demand. In the current competitive landscape we offer a higher price which means we have a slightly smaller attractiveness relative to our competitors this is reflected on the graph. According to our client, the competitor will be collective housing in the North part of the city by definition this type of housing will be aggregately cheaper than our client s housing. 6

7 D. 1. Yes, The current strategy of Casa GranTurismo is to focus on making better design to promote a life style to the region. 2. Yes, because the value in our strategy is about promoting a new life style through design, although it is an experiment for housing strategies for this region but it will most likely requires a long time for competitors to emerge. Therefore, before this project makes a big social impact on its success, other developers are less likely to imitate it, and the gain will be appropriable If the business is successful, the value will be accrue to the organization. 3. The value is quite vulnerable because once Casa GranTurismo succeeds, it will prove the market strategy that they are experimenting. As a result, competitors with larger financial, political support with better designers will emerge and take a large share of the market. In order to keep up his place in the market, Casa GranTurismo will have to invest more in design and innovation. 4. The balancing loop will be the more successful Casa Gran Turismo is, the more imitators will emerge. 7

8 E. 1. Analysis of the firm's strategy. Strategy 1: promote a lifestyle and appreciation for architecture design Strategy 2: help the government to experiment with the future market of housing and in the case of success use this to self promote (i.e. the mayor that supported this initiative will be reelected in the case of successful product acceptance) Strategy 3: Reliance on economies of scope. (NB we can t benefit from economies of scale in architecture in general). This is a relatively new type of combination of urban planning and architecture. Initially the cost to develop will be high, however there are a number of transferable costs that will lower the cost to develop for each consecutive plot e.g. materials, builder skills, architect skills. Additionally since we are forging a new market we initially have to spend a lot on advertising to educate the population, but with time we ll spend less on advertising as we build recognition and brand name. 2. Describe your diagram, how they capture the competitive dynamics of your chosen firm and industry Strategy 1: R3 is a reinforcing loop that demonstrates the effect of product differentiation on the market share. We believe that as a superior product implementing aesthetical architectural design we will increase the appeal of our product which in return will drive adoption/buying rates. In return this will increase our revenues which will allow us to invest more in the product design. Hence, we ve named that loop Product differentiation. Strategy 2: R5 (Government help for loan) R4 (Media effect on government) demonstrate the strategy described above. Basically, we are trying to enlist the government into helping us 1) secure loans to develop the plot and 2) selfpromote ourselves. In the first diagram we give further detail how involvement with the government is a mutually benefiting activity. One the one hand the government helps us gain credibility and on the other if our project succeeds the government gets more popularity. We would also wager that there is a third effect from this symbiosis which is the indirect effect of government on media coverage of our product. This is seen in loop R4 Media effect. Strategy 3: Economies of scope is observed in the loop R6 where more experience drives down the cost to develop further projects. With time we will decrease our cost but we do plan to keep the same price which would increase our profit margins and help us further expand our building efforts into new plots. 8